Chapter (7) Master Budget : Overall Plan

1. Chapter (7)Master Budget : Overall Plan

2. Budget Is a tool that helps managers both plan and control operations. In this chapter we will look at the uses and benefits of budgets and consider the construction of the master budget.

3. Objective 1 Distinguish between Master Budgets and Long- Range Planning

4. Strategic Plan A plan that sets the overall goals and objectives of the organization. Note Some business analysts do not call a strategic plan a budget because it covers no specific period and does not produce forecasted financial statements.

5. Long-range planning produces forecasted financial statements for 5- or 10-year periods. Long-range planning are coordinated with capital budgets. Capital Budget A budget that details the planned expenditures for facilities, equipment, new products, and other long - term investments .

6. Thus, the master budget is a periodic business plan that includes a coordinated set of detailed operating schedules and financial statements. It includes forecasts of sales, expenses, cash receipts and disbursements, and balance sheet. Management might prepare monthly budgets for the year or perhaps monthly budgets for only the first quarter and quarterly budgets for the remaining three quarters. Master Budget A budget that summarizes the planned activities of all subunits of an organization – sales, production, distribution and finance.

7. A common form of master budget that adds a month just ended is dropped. Continuous Budget (or Rolling Budgets) Continuous budgets compel managers to think specifically about the forth– coming 12 months and thus maintain a stable planning horizon.

8. Objective 2 Distinguish between Operating and Financial Budgets

9. Components of Master Budget The two major parts of a master budget are the operating budget and the financial budget. Operating budget (profit plan) A major part of a master budget that focuses on the income statement and its supporting schedules. Financial budget The part of a master budget that focuses on the effects that the operating budgets and other plans (such as capital budgets) will have on cash.

10. The usual master budget for a non – manufacturing company has the following components A. operating budget B.Financialbudget • Sales budget. • Purchases budget. • Cost-of-goods-sold budget. • Operating expenses budget. • Budgeted income statement . • Capital budget • Cash budget • Budgeted balance • sheet

11. Exhibit 7-1 presents a condensed diagram of the relationships among the various parts of a master budget for a non - manufacturing company. In addition to these categories manufacturing, companies prepare ending inventory budgets, production budget, and additional budgets for every resource activity (such as labor, material, and factory over heads)

12. Sales Budget Ending inventory Budget Purchases Budget Cost- of- Goods - Sold Budget Operating Budget Operating Expenses Budget Budgeted Statement Of income Budgeted Balance Sheet Capital Budgets Cash Budget Financial Budget

13. Objective 3 Identify a Budget’s Major Advantages to an Organization

14. Advantages of Budgets Formalization of planning Budgeting forces managers to think ahead to anticipate and prepare for changing conditions. The budgeting process makes planning an explicit management responsibility. To prepare a budget, a manager should set goals and objectives, and establish policies to aid their achievement. Without goals and objectives , company operations lack direction; problem are not foreseen; and results are difficult to interpret afterward.

15. Framework for judging Performance Budgeted goals and performance are generally a better basis for judging actual results than is past performance. The major draw back of using historical results for judging current performance is that inefficiencies may be concealed in the past performance. Communication and Coordination A good budget process communicates both from the top down and from the bottom up. Top management makes clear the goals and objectives of the organization in its budgetary directives to middle and lower-level managers, and to all employee. Employees and lower-level managers then inform higher - level managers how they plan to achieve the goals and objectives.

16. Budgets also help managers coordinate objectives. For example, a budget forces purchasing personnel to integrate their plans with production requirements, while production managers use the sales budget and delivery schedule to help them anticipate and plan. For the employees and physical facilities they will require. Similarly, financial officers use the sales budget, purchasing requirements, and so forth to anticipate the company’s needs for cash. Thus the budgetary process forces managers to visualize the relationship of their department’s activities to other departments and to the company as a whole.

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